Exceptions: The doctrine of indoor management is subject to the following exceptions:
1. Knowledge of irregularity: Under the rule of indoor management the benefit cannot be claimed if a person dealing with a company has the knowledge of the irregularity in its internal management.
2. Acts are void ab initio and forgery: The doctrine of indoor management will not be used, where the acts done in the name of company are void ab initio. The doctrine is applicable only to those irregularities that otherwise might affect a genuine transaction. It does not apply to forgery. A company cannot be made liable for forgeries done by its officers.
3. No knowledge: A person having no knowledge of Articles of association cannot ask for protection under the indoor management.
4. Negligence: If the irregularities are discovered by the person dealing with a company, on making proper inquires, he cannot claim the advantages of the rule of indoor management. No protection of the rule is possible, where the circumstances surrounding the contracts are so suspicious as to invite inquiry and the outsiders dealing with the company does not make proper inquiry.
5. Act outsides the scope of apparent authority: if an officer of a company enters into a contract with a third party and if the act of the officer is beyond the scope of his authority, the company is not bound.
1. On registration of Memorandum of Association and Articles of association, what contractual relationship is established between different parties?
According to section 36(1) of the companies Act, 1956 the Memorandum of Association and Articles of association when registered bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member and contained covenants by the company and each member to observe all the provisions of the Memorandum of Association and the Articles of association.
The object behind this section is to import contractual forces to the Memorandum of Association and Articles of association. A contract is constituted by the Memorandum of Association and Articles of association of the company by the effect of these provisions between each member and the company. As a result of this a number of legal relationships are developed between different parties and the company as explained below:-
Between the company and the members:
(i) The Memorandum of Association and Articles of association develop a contract between the members and the company.
(ii) However, opinion varies on the questions as to whether and how far the Memorandum of Association and Articles of association bind the company to the members.
(iii) One of the opinions is that it binds in the same way its members are and another opinion is that the company is not wholly bound.
(iv) It is not correct to say that the company is wholly bound, so that any member can sue it so as to prevent any breach of the Articles of association which is liberally meant to affect his right as a member of the company.
(v) An individual member passes the power to file a suit against the company to enforce their individual, rights for example, right to get back his shares wrongfully forfeited, right to contest election for directorship of the company, right to receive a share certificate ect.
(vi) The members filling suit in these cases sues not in the right of a member but in his own right to safeguard himself from the invasion of his own individual right as member.
(vii) Moreover, the rights granted to a member must be in his capacity as a member and in any other capacity such as a solicitor.
Between the member inter-se:-
(i) No express agreement is developed by the Memorandum of Association and Articles of association between the members of the company yet each and every member of the company is bound by the Memorandum of Association and Articles of association on the basis of an implied contract to other members.
(ii) In the case of Welton V. Jaffrey App. Cas. 299 it was held that the Articles of association regulate the rights of the members inter se but such right can be enforced only through the company or through the liquidator representing the company.
(iii) The Articles of association cannot regulate rights arising out of a commercial contract in which other share holders have no interest.
(iv) Therefore, an arbitration clause in the Articles of association of a company could not be invoked where a number of a company had a commercial dispute of a private nature with another member of a company.